We’ve previously discussed how long it takes to get to Financial Independence (FI) starting with a net worth of $0, and starting with more than $0. But what if you have a NEGATIVE net worth? In other words, what if you have significant debt (e.g. credit card debt or student loans)?
First off, unless you took on student loans to obtain a degree that will power a high paying career, you need to recognize that YOUR HAIR IS ON FIRE! Action must be taken immediately!
In the last article, I described how the time it takes to achieve Financial Independence is based on three factors: 1. Your savings rate (by far the most important factor), 2. the assumed investment ROI (usually something conservative like 5% to 7%), and 3. the withdrawal rate assumed (usually around 3.5 to 4%).
BUT, I used a big assumption: starting with $0.
But really, nobody has a net worth of exactly $0.00 (well, I’m sure there might be a handful of exceptions at any one time on a planet of 7.9 Billion).
50%. Or higher. 70% to 80% is even better.
Am I serious? I can’t possibly be serious. Right?
Actually, yep, I am totally serious. And yes, I know that’s a crazy simple answer and probably seems totally impractical for most readers. But hear (read?) me out.
This week Mrs. EYFI and I will be attending our very first FinCon conference, which we’re very excited about. We’ve been hearing about FinCon for years now, and this year we are super lucky that the conference is a 20 minute drive from our house here in Austin, TX.
A couple years ago my wife and I were procrastinating yet again on selecting a health care plan option. Specifically, which of two plans to select for her and our son that were offered by her company. My health insurance is super simple: I’m fully covered, no premiums (ignoring dental and vision). But hers was hard! There’s a huge amount of information to consider, from premiums to deductibles to co-pays to co-insurance rates to tax-savings to traditional vs high-deductible plans to how much to put in your FSA or HSA…. Insane.
I got fed up with trying to eyeball this decision. So, I broke out Python! I managed to script up and plot a wide variety of scenarios, and as a result the decision finally became clear. I love Python and plots – I’m definitely an engineer to the core.
Note: this article was originally posted on a different site and written prior to the Coronavirus global pandemic that caused the vast majority of people to significantly reduce their entertainment expenses. But I think it’s still valuable content, especially for when we get back to “normal times” (whatever those will look like). Also note that some of the comments below are from that original post (thus the older comment dates).
When you’re getting started down the more frugal path, it can be challenging to figure out where to start when it comes to cutting your expenses. Some folks will argue you should start with the biggest expenses, just like mathematically it makes sense to pay off your highest-interest debt first (versus loans with smaller balances as part of the standard “snowball” approach). For example, work on moving to a more affordable area or house first.
While I am a proponent of paying off your highest-interest debt first (regardless of the balance), when it comes to expenses I definitely encourage folks to start with the easiest effort items and work your way up as your frugality muscles gain strength. Cutting expenses is more challenging (in general) than just picking which card to pay off next. And hopefully credit card debt won’t be a problem for you for very long if you work hard on reducing your expenses!
For years I put off thinking about refinancing our house. I just didn’t want to deal with all the factors I would have to consider, even though our 30 year mortgage rate wasn’t that great (4.75%).
Then I started seeing some news articles about mortgage rates hitting all time lows. Gritting my teeth, I finally forced myself to buckle down and take a careful look.
So if wife and I are FI, why are we still working?
Well, as I wrote in “FI Explained”, Financial Independence does not equal Early Retirement. When we started seriously pursuing FI after I obtained my PhD in 2016, we never set a goal to retire in our 30’s, even though theoretically we could retire if we wanted to.
So what is FI? FI = Financial Independence. Gotta love acronyms. But what exactly does “Financial Independence” mean?
A pretty common definition is that you’re no longer financially dependent on your parents or some other caregiver. So basically when you’ve moved out and you’re earning money on your own – enough to pay for all your expenses. That also means you aren’t racking up credit card balances!
While this level of financial independence is an important first step, on this site we’ll be talking about something MUCH bigger. So what DO we mean?
My wife and I discovered the Financial Independence community in 2016, which opened our eyes to the possibility of achieving FI at an early age with moderate incomes. With a healthy amount of effort, we achieved FI four years later at ages 35 (me) and 33 (my wife).
Four years sounds quick, doesn’t it? In reality, our journey to FI started the same place as it did for many other folks in the FI community: our childhood. We were both fortunate to grow up in middle-class families that emphasized the value of saving money from an early age. We both had allowances that we earned through doing chores, and we were both expected to pull most of our weight when it came to funding our education. But we also never had to worry about whether we’d have food on the table or a roof over our heads, which makes us vastly more fortunate than millions of people around the world.
